Tiff Macklem: The Bank of Canada remains firmly committed to keeping inflation under control

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As the third wave of the pandemic recedes and vaccination rates rise, Canadians are feeling a sense of relief and renewed optimism. But there are also new concerns, including what’s happening to the cost of living. Statistics Canada says the inflation rate was 3.1 per cent in June. That’s above our one-to-three-per-cent target range — and it’s been above our range for three months in a row.

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Even before the pandemic, we knew Canadians cared about inflation. As part of our process to renew our agreement with the Government of Canada on our monetary policy framework, we reached out to the public so their views could inform our work. Many people told us they manage their expenses carefully, and rising prices make it hard to pay all their bills. And we heard from people who feel the consumer price index (CPI) doesn’t always reflect their experience with inflation.

Statistics Canada has updated the basket of goods and services that makes up the CPI, so it better reflects how buying habits have changed recently. The updated index shows clearly that prices of many goods and services are rising quickly. At the Bank of Canada, it’s our job to understand why prices are rising and whether this is likely to continue. This understanding helps us figure out how to adjust monetary policy to control inflation. By influencing the interest rates where households and businesses borrow, we try to bring about a balanced economy with a healthy labour market. And this helps keep inflation near our target.

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When the pandemic hit in spring 2020, it caused major economic hardship — millions of Canadians lost their jobs. To help Canadians get through the crisis, governments provided important supports, and we cut our policy interest rate as far as we could. The economy has come a long way back. But we are still short more than half a million jobs to get back to the pre-pandemic employment rate. By making it cheaper for Canadian households and companies to borrow, we’re helping stimulate the demand that will get Canadians back to work.

Why is inflation higher now? It’s mostly because of the unique circumstances of the pandemic. Prices for many goods and services plunged last year. Today’s inflation rate compares prices now with their depressed levels a year ago, making the increase more dramatic.

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The average price for gas, for example, fell below 80 cents a litre in March last year. But gas prices recovered over the following few months and rose further as the outlook brightened. So, gasoline prices are now close to $1.40 — well above their levels from a year ago.

That’s not the only way the pandemic has affected inflation. Containment measures made it hard for companies to get the workers and the supplies they needed to produce some goods. At the same time, people were buying more goods because they couldn’t buy hard-to-distance services (for example, they may have bought a bicycle instead of a gym membership), and this had a big impact on some prices. New cars and many electronics are more expensive now because the pandemic created a global shortage of computer chips. Shipping problems made it hard to move goods around, making some products scarce. And the prices of many commodities like lumber went up with strong demand for housing.

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All these factors have driven prices up, but none of them are likely to last. So, we shouldn’t overreact to these temporary price increases. Lumber prices have already fallen sharply. Over the next few months, there may be more disturbances and sharp price movements as we return to more normal activities. But as we’ve seen, Canadians are adaptable and resilient. Inflation should move back inside our target range next year as businesses work through these temporary factors and the people who lost their jobs during the pandemic rejoin the workforce.

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But securing this recovery could take time. That’s why we’ve pledged to keep our policy interest rate at its lowest possible setting until the economy fully heals. It’s hard to know when that will be. Right now, our forecast is the second half of 2022. Keeping interest rates low until then gives the best chance for a complete recovery. And that gives us the best chance of keeping inflation close to our target over time.

The message I want to leave with you is this: The Bank of Canada remains firmly committed to keeping inflation low, stable and predictable. Even with the gyrations caused by the pandemic, inflation has averaged pretty close to target through the past few years to today. You can be confident that we will keep the cost of living under control as the economy reopens.

The pandemic has taken lives and livelihoods and pummelled our economy. The Bank of Canada was there to prevent deflation when the economy plunged. We remain just as determined to secure a complete recovery and keep inflation under control.

Tiff Macklem is Governor of the Bank of Canada.